India Recommends Canceling 172 Coal Mining Permits

A worker directs a loader collecting coal at the Goladi coal depot, operated by Coal India Ltd., in Jharia, Jharkhand, India. The country's coal ministry started allocating mines to companies for their own use after realizing monopoly miner Coal India Ltd. was failing to keep pace with demand. Photographer: Sanjit Das/Bloomberg

Sept. 2 (Bloomberg) -- India proposed canceling 172 unused
permits to mine coal, while allowing 46 operational mines to
keep working to address a Supreme Court ruling that struck down
all coal-mine allocations made since 1993.

The government is prepared to auction off new licenses for
the canceled mines, Attorney General Mukul Rohatgi said in his
argument to court in New Delhi yesterday. The court said “it
was leaving its options open” and set Sept. 9 for a final
hearing.

The proposal would keep production of the fuel that powers
more than 60 percent of India’s generation capacity going, while
potentially jeopardizing several projects, including power
plants, steel mills and aluminum smelters. Hindalco Industries
Ltd. and Jindal Steel & Power Ltd. may be the most affected,
Morgan Stanley said after the court’s ruling last week.

“We should be careful of considering auctions as a
solution for the natural-resources sector,” said Kameswara Rao,
executive director for energy and utilities at
PricewaterhouseCoopers LLP. “The sector is dominated by some
large players, and an auction policy can discourage
competition.”

Because the court ruled that all coal allocations were
illegal, it wasn’t clear how the 46 mines could be given legal
validity, Rao said.

Of the 46, 40 are already in operation and six are on the
verge of starting. Rohatgi didn’t identify the 46 mines or their
owners by name.

Additional Royalty

The government suggested the court impose an additional
royalty of 295 rupees ($4.87) a metric ton for coal that has
already been taken from the operational mines.

India’s coal ministry expects domestic production of 53
million tons in the year to March 2015 from captive coal blocks
run by companies, including Hindalco, Jindal Steel, Reliance
Power Ltd., CESC Ltd. and Jaiprakash Associates Ltd., according
to its website. That’s about 9 percent of the nation’s total
annual production of the fuel.

Hindalco fell as much as 1.5 percent to 173.50 rupees as of
9:42 a.m. in Mumbai, while Jindal Steel declined 2.9 percent to
240.75 rupees.

“Irrespective of what the decision is, it will be in the
interest of the nation,” Coal and Power Minister Piyush Goyal
said Aug. 25, after the court’s ruling, adding the judgment will
help the sector move on.

The allocations didn’t serve any common good, the court
said in its 163-page ruling last week.

“The approach had been ad-hoc and casual,” the ruling
said. “There was no fair and transparent procedure, all
resulting in unfair distribution of the national wealth.”

Unmet Demand

The coal ministry started allocating mines to companies for
their own use after realizing monopoly miner Coal India Ltd. was
failing to keep pace with demand. The ministry awarded 218 coal
permits from 1993 to 2011. Of those, 80 were later canceled for
not meeting output targets.

Criticism of the procedure forced the previous government
of Prime Minister Manmohan Singh in 2010 to amend laws and adopt
an auction process. No auctions have actually occurred since the
new policy was introduced.

India’s state auditor in 2012 found that allocating the
mines to companies without an auction may have cost the
government 1.86 trillion rupees, worth $33 billion at the time.